In addition, there would be a single EU supervisor with ultimate decision-making powers for the major banks, and a common set of banking rules.

"Today's proposal is an essential step towards a banking union in the EU and will make the banking sector more responsible," said European Commission President Jose Manuel Barroso in a statement. "This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies."

The amount of the common bank rescue fund was not disclosed.

But the EU said that various countries in the 27-nation bloc approved €4.5 trillion in emergency funding for banks between October 2008 and October 2011, an amount equal to 37% of the EU's gross domestic product.

Spain is now weighing a request from Bankia, its fourth-largest bank, for a €19 billion bailout, while Spain's central bank has identified about €300 billion in problem loans across the nation's banks. On Tuesday, the Spanish finance minister said his country will need help dealing with its banking problems, putting the Spanish banking system at the epicenter of worries about European sovereign debt.

And there are fears that the problems in banking systems and sovereign debt of weaker countries such as Spain or Greece could spread to banks in stronger economies. Wednesday credit rating agency Moody's downgraded seven German banks as well as the three largest banking groups in Austria.

"Today's rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks' limited loss-absorption capacity," said Moody's in the German bank note.

The EU's banking union proposal may take years to put into place so it won't do much to address the current banking crisis in Europe.

"The difficulty is for us to do two things at once, take the necessary measures that are urgently needed in order to address specific problems in different countries like Greece and others...but prepare also at the same time for the future," said Michel Barnier, the internal markets commissioner for the EC at the press conference. He said Wednesday's plan will set up the kind of regulatory and banking infrastructure needed to prevent future crisis.

"We've seen the consequences of not having such a system," he said. "Prevention is much much better than cure. If you're prepared, it's much less costly than emergencies."

The announcement came as the European Central Bank held a regularly scheduled meeting, with the ongoing sovereign debt and banking crisis in Europe in focus. The ECB left its key interest rate unchanged at the meeting.